Thursday, 20 October 2016

Federal Hotels treads water

It’s been 13 years since the government and Federal Hotels agreed to an extension of the original 1993 exclusive gaming license covering table gaming, electronic gaming machines (EGMs) and Keno in Tasmania.

Federal Hotels’ 2016 financial statements lodged with ASIC last week revealed another $15 million paid as dividend to shareholders. This takes the total to $199 million in 13 years, an average of $15 million per year. The dividends represent 60 per cent of after tax profits, an extraordinarily high payout ratio for a capital intensive tourism business. These fully franked or tax paid dividends are equivalent to a before tax return of $22 million per year.

The other party helping itself to the cash tin was the bank whose borrowings were further reduced by $16.5 million. There was a time when the reverse was true. From 2003 to 2011 bank borrowings increased almost fourfold from $56 million to $200 million, but with the gradual erosion of gambling revenue prompting a decline in net profits, the banks obviously decided enough was enough. Since then borrowings have been reduced to $123.5 million, all of which is now listed as a current liability. This suggests borrowings are to be renegotiated during this current year.

Overall player losses from gaming have been declining since 2009 due to fewer EGM losses. Keno has bucked the downward trend. Its relative share of the gaming pie has almost doubled since 2004, which combined with low tax rates has made Keno an important contributor to Federal Hotel’s bottom line.

Federal Hotels’ opportunistic 2015 request made in response to Mona’s David Walsh’s interest in a casino license, to extend its sole license so that it could fund $100 million of upgrades to its casinos and a new venue at Port Arthur that’s been on the drawing board for years was a peerless display of chutzpah. After the 2003 extension/Saffire trade-off, the Port Arthur project sounded like déjà vu all over again? And the need for casino upgrades wouldn’t have anything to do with the decline in EGM revenue relative to pubs and clubs coinciding with a decline in overall EGM turnover would it?

If funds are needed to upgrade existing facilities they should be sourced from retained earnings, borrowings or shareholder contributions just like every other business. It shouldn’t require another special deal. This is not a start up company that may require encouragement. This is a major player in a mature industry competing with many others who aren’t given the same advantages.

It was fortunate Federal Hotels stashed a little away following the sale of its regional tourism assets at Strahan, Cradle Mountain and Freycinet in 2014, because much of it was needed to meet the demands of both the bank and shareholders in 2016. But when it came time to pay for the Newstead Hotel, the twelfth pub in Federal’s Vantage stable, all ranked in the top 24 pokie performers across the state, Federal Hotels could only come up with 20% of the purchase price from its own sources. A loan from a third party of $8.6 million was needed. The bank must be a little wary with the exclusive gaming license having a 2023 sunset clause?

With the abandonment of its regional tourism strategy and the walkout from the West Coast Wilderness railway, Federal Hotels has been long on promises, if the 2003 parliamentary inquiry into the Deed extension is a guide, but short on delivery. The only new tourism asset built since, is the mandated Saffire at Coles Bay. Other capital additions have been existing businesses, either lucrative pokie pubs or bottleshops. Even the impending, much trumpeted MACq 01 development is just a fit out.

When Federal Hotels operated its regional venues, advertising and promotion had the effect of promoting tourism across the State. The original 1993 agreement required Federal Hotels to spend at least $8 million a year promoting and marketing tourism. This clause or one with similar intent is absent from the now operative 2003 Deed.

Even critics begrudgingly admit that Federal Hotels’ advertisements had spill over benefits for the whole state. Whatever was good for Federal Hotels was good for Tasmania. But its retreat from regional Tasmania has left it back in the peloton hanging off David Walsh’s coattails like everyone else in the Hobart accommodation business.

Any attempt to link EGMs and Keno with the tourism industry should be resisted. For too long the tourism industry has acquiesced to Federal Hotel’s dominant position in the industry because in part there were spill over benefits. After 2011 however reality struck Federal Hotels and its strategy changed with more emphasis on EGM pubs and less on regional tourism. Acting as Federal Hotels’ praetorian guards as it plunders the pockets of pokie players and secures a competitive advantage for itself against others in the hospitality industry, is a bit much to behold, especially when in the next breath, the industry makes further demands on government to underwrite advertising across the entire industry and to fund AFL matches and other major events.

It is sometimes forgotten that whilst Federal Hotels dominates the electronic gaming scene in pubs there are another six or so groups with multiple venues, who in total, together with Federal Hotels own or run 90 percent of the top 50 EGM pubs. Any push to retain existing privileges will be strongly resisted by this band that largely operates on the periphery of the tourism industry, more in the broader hospitality industry servicing Tasmanians. Will they all stick together or will it be as in the case of the Lone Ranger and Tonto facing a hostile enemy when the Lone Ranger said: “It looks like we’re in a lot of trouble old friend”, to which Tonto replied “What do you mean ‘we’, Paleface?”

With the expiry of current gaming arrangement in 2023 few will be able to argue they haven’t achieved an adequate return on their gaming investments. There is no need for the government to pander to anyone. Super profits from gaming could have, for example, funded the State’s social housing backlog instead of ending up in the pockets of a few. It’s an opportune time to change the landscape.

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